Merger Would Let Pfizer Duck A Billion Dollars In U.S. Taxes Each Year

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A major corporate takeover in the prescription drug industry is motivated in part by a desire to duck billions of dollars in U.S. taxes, the Wall Street Journal reported Monday night. If Pfizer is successful in its bid for AstraZeneca, the combined firm would set up its technical headquarters abroad, slashing its tax liability but still allowing the company to conduct day-to-day operations from its current American headquarters.

Pfizer currently holds tens of billions of dollars in profits offshore to avoid American taxes, a practice so common that total offshored corporate profits hit $2 trillion earlier this year. Acquiring the British firm AstraZeneca and moving the merged company’s tax home to Ireland, the Netherlands, or some other tax haven country “would still allow me to access the offshore funds and do it in a tax-efficient way,” Pfizer’s top financial executive told the Journal.

Corporate accountants have a name for shifting a company’s tax home without modifying its actual operating structure. Known as an “inversion,” the practice has been around for almost twenty years. Companies used to be able to invert at will — in the late 1990s, for example, American heavy manufacturer Caterpillar simply hired an accounting firm to set up a Swiss subsidiary to hide profits from U.S. authorities — but as rules have tightened, inversions have become more and more difficult to conduct. Today, inversions are only possible as part of international acquisitions of the sort Pfizer is pursuing.

That hasn’t dented their popularity across various industries. When Chiquita bought Fyffes earlier this year, it shifted its tax headquarters to Ireland. Less recognizable American corporate names like Perrigo, Actavis, Endo Health Solutions, and Applied Materials have all inverted through international mergers in recent years, and Walgreens is under pressure to invert as well. Most of the largest corporate tax evaders, however, had structured themselves to exploit international tax code loopholes and tax havens prior to any merger.

Companies like Apple, Google, General Electric, and IBM have long used overseas shell companies to shrink their tax bill back home. The practice is entirely legal, exploiting weaknesses in American law and the patchwork nature of the international business tax system. Countries like Ireland, Luxembourg, the Cayman Islands, and the Netherlands engage in a race to the bottom on business taxes in order to lure tax-savvy businesses. Reform proposals discussed in the U.S. and Europe would do little to change that dynamic, and a more radical shift in how corporate sales get taxed around the world might be necessary.

In the meantime, the U.S. will continue to lose between $30 billion and $90 billion to corporate tax practices each year.